Understanding the Concept of EBR
External benchmark rate or external benchmark lending rate was implemented by the RBI in 2019. External benchmark rate is a reference rate used by all Indian banks to determine the floating interest rate on various loans. External benchmark rate is mandatory to apply to Personal loan, Retail loans and MSMEs. According to the board approval policy of the bank, they can adopt EBR for any other loan as well.
Types of External Benchmark Rate
- Repo rate: It refers to the interest rate at which RBI lends funds to the commercial banks. Any change in the repo rate brings a direct impact on the borrowers’ loan rates.
- FIBIL Benchmarks: It is an entity approved by India, which publishes benchmark rates such as The 91-day T-bill yield, The 182-day T-bill yield. This yield also changes from time to time.
- If the FIBIL adopts any other benchmark, that would also be considered as an external benchmark.
Key Points of EBR
- The lending rates for individual loan shall not be below than external benchmark lending rate
- Spread over benchmark can only be altered once in 3 years
- The reset period of EBLR is 3 months
Impact of Change in EBR
- The ROI on individual loans will be increased if the EBR increases
- The ROI on individual loans will be decreased if the EBR decreases
Benefits of EBR
- Transparency: The loan interest rates are linked to publicly available benchmarks that ensures transparency amongst the bank and the borrower.
- Policy rate cut: Being a public benchmark means any cut in the policy rate reaches the borrower real quick.
External benchmark rate was introduced by the RBI to maintain fairness and transparency in loan pricing. Linking loan rates to external benchmark rates empowers borrowers with competitive pricing of loans.
